25 January 2012
|SINGAPORE experienced a phenomenal economic recovery in 2010 after the 2009 global financial crisis. Now, just over a year later, it is riding on a tide of uncertainty as the sovereign debt crisis in Europe and the US economic woes may tip the world into recession this year.
We are at a unique point in history, as economic power shifts towards Asia and hopes are placed on Asia as the next engine of economic growth. This shift could present opportunities for Singapore to fortify its position as a choice gateway to Asia and the world.
A key component of this strategy will involve reviewing Singapore's tax regime, which has been key in helping Singapore attract investment so far. With a corporate tax rate of 17 per cent — already among the lowest in Asia — the feedback we have received from businesses is that there is no pressing need for further tax rate cuts in the immediate term.
To differentiate Singapore from regional competitors such as Hong Kong, focus should instead be directed at simplifying the tax system and providing greater certainty for businesses investing in the region through Singapore. Budget 2012 may therefore be an opportune time for measures which enable Singapore to turn current economic adversity into market opportunities.Singapore is already well placed to take advantage of trade flows into Asia, especially South-east Asia.
The following are our suggestions which may help to boost Singapore's appeal as a jurisdiction of choice for regional investments.
In the recent Financial Development Report 2011 published by the World Economic Forum, Hong Kong is now ranked as the world's top financial centre, while Singapore dropped a notch to fourth position.
When businesses undertake cross-border transactions or foreign investments, double taxation can occur which significantly reduces profit margins. Tax treaties help to minimise such double taxation.
Singapore's extensive tax treaty network has in the past been an advantage in attracting holding companies. Just as our traditional competitor Hong Kong has been concluding new treaties with its trading partners for more favourable terms, Singapore cannot afford to stand still.
More than ever, there is now a pressing need to ensure that terms of the existing treaties remain favourable. This is especially so for older treaties concluded with Australia, Indonesia and Thailand.
New treaties to expand the network should also be explored. Furthermore, innovative measures such as multilateral tax treaties (for example, championing an Asean tax treaty) should be considered.
The recent introduction of foreign tax credit pooling system is a positive development for encouraging the repatriation of foreign sourced income. It allows for the pooling of tax credits arising from foreign taxes suffered across various types of foreign income.
However, any unutilised tax credits cannot be carried forward to future years and are forfeited. Allowing the carry forward of unutilised foreign tax credits to future years may help reduce the tax costs for companies operating from Singapore with a regional presence.
The headquarter incentives have helped Singapore attract top multinational companies in the past and created high value jobs for Singapore residents. However, the concessionary tax rate of 15 per cent may no longer be attractive given Singapore's prevailing headline corporate tax rate of 17 per cent. Furthermore, the various headquarter incentives allow only 'incremental income' (income over a certain tax base) to enjoy tax concession. Both the concessionary tax rate and the 'incremental income' requirements should therefore be reviewed.
Gains of a capital nature are currently not subject to Singapore income tax. However, businesses using Singapore as a base to operate in the region often face uncertainty on the income tax treatment of gains derived from subsidiaries divested for business reasons.
Many parent-subsidiary types of corporate structure currently enjoy the benefits of participation exemption regimes in many regions such as Europe. The introduction of similar certainty in the income tax treatment of divestment gains here would be welcome. It would facilitate businesses expanding into the region through mergers and acquisitions while offering them the flexibility to streamline or reorganise their corporate structures to cater to rapidly changing needs.
Although Hong Kong's natural proximity to China has played a pivotal role in her development, having a matured capital market is also a key success factor. The following are measures we believe may further broaden and deepen Singapore's capital market to position her as a gateway to Asia.
Various fund vehicle tax exemption schemes have been introduced to help Singapore position itself as a wealth management hub. However, funds are only exempt on qualifying income derived from designated investments. The list of designated investments should be broadened to include investments in infrastructure assets and other alternative investment classes (such as carbon credits) so that fund managers can offer a wider spectrum of investment opportunities.
Fund managers play a pivotal role in the fund management industry. Qualifying fund managers often enjoy a 10 per cent concessionary tax rate under the Financial Sector Incentive scheme. This concessionary rate should be lowered to 5 per cent to attract more global and reputable fund managers, as well as foreign boutique fund managers.
Conventional capital markets are experiencing deleveraging and falling liquidity brought about by the current eurozone crisis. Singapore businesses may look to relatively unscathed regions such as the Middle East and Asia to provide alternative sources of funding.
This may be an opportune time to review the existing tax framework for Islamic financing, since only prescribed Islamic financing currently have tax treatments aligned to their conventional equivalents.
To narrow the competitive gap with Islamic hubs such as Malaysia and encourage innovation, the current tax alignment rules should be extended to include all Syariah-compliant Islamic financing instruments. Such a shift in policy will accord more upfront tax certainty and enable businesses to seize opportunities by minimising the need to obtain guidance from the Singapore tax authorities.
As we approach the Lunar Year of the Dragon, we believe the above initiatives may enable Singapore to turn adversity and uncertainty into opportunity, and bring prosperity in this auspicious year!
The writers are tax partners of KPMG in Singapore.